In my view, the manipulation (more accurately, “suppression”) of precious metal prices is the most recognized “open secret” in markets today.
That is, virtually everyone who participates in the markets that set PM prices understands - takes for granted - that prices are capped and will not be allowed to rise above a certain price point.
A recent commentary by Art Cashin pretty much makes this point.
Cashin points out that gold prices are in “backwardization,” which means today’s spot price is higher than the price one would have to pay for a near-term future contract.
Given this, why wouldn’t every trader sell bullion at today’s higher spot price and then take the proceeds to buy a contract at next month’s (lower) future price?
Such “arbitrage” tactics almost guarantee a profit. So why doesn’t everybody do just this?
The answer, speculates Cashin, is that “everybody” knows just because they bought “gold” or “silver” at a lower price doesn’t mean they will actually be able to take possession of the metals.
The “open secret” then is that everybody knows the metal is not there. They know that they are just trading “paper” not the real stuff. Whether they publicly admit it or not, they know the game is rigged - that the prices of real gold and silver are nothing close to the prices that are quoted in future contracts.
Stand and deliver
I’m one of many pundits who subscribes to the theory that price manipulation/suppression will end when it simply can’t continue.
Which means (in my understanding anyway) that it will end when someone (or many someones) purchase a significant amount of ounces, demands delivery, and then finds out that the seller cannot provide the product.
It seems to me that such a scenario could easily happen any day.
That this does not happen might be the best evidence of all that all the major possible buyers in the market are “in on the game.” They:
1) Know that large amounts of gold and/or silver do not exist to fill a sizeable order. Or:
2) They know that the act of simply asking for delivery would likely cause all hell to break loose in the markets.
They know that such a delivery request would, in fact, jeopardize the “status quo” economic and monetary system that depends on the dollar being considered a safe “safe haven” asset.
That is, China (or Warren Buffet or your state’s Retirement System) could make a silver order today that would end the Status Quo as we know it.
I follow silver more closely than gold. If, say, the nation of China invested a measly $1 billion to take possession of physical silver, they could acquire approximately 50 million ounces of physical silver ounces at today’s prices.
Theoretically, this nation could do this right now. Realistically, they couldn’t do this as who has even 50 million ounces of physical silver laying around in a vault to be picked up by a Brinks truck? And for China (or even Warren Buffet or Bill Gates) $1 billion represents spare change that can be found in between the sofa cushions.
A purchase of this size would almost certainly pay a handsome profit as a “buy order” of this scale would no doubt cause the price to explode upwards.
There’s a good chance such a purchase would create copy-cat orders or even “panic buying.” It’s not implausible that one giant order could lead to many more orders which collectively could lead to a major price spike.
In a few months, silver might be selling for $30 or $40, not $20. China’s (or Buffet’s) investment could double in value in a surprisingly short period of time.
But this does not happen. The reason it doesn’t happen is that China (or Buffett or JP Morgan) do not want it to happen.
Yes, they could double their “money” in terms of the dollar value of their silver portfolio, but they know that if gold or silver were to surge in price, the valuation of their dollar-denominated assets would plummet by probably an even greater percentage.
In other words, their mega silver purchase would likely harpoon their portfolios of stocks, bonds and treasuries. Indeed such a conspicuous foray into precious metals might change the “rules of the game,” a game in which they are faring quite well thank you.
“Why would we want to do this?” they have no doubt asked themselves.
Plus, in the case of China at least, this nation’s braintrust is quite content to accumulate precious metals gradually and at the lowest possible price. For all we know, the status-quo price suppression system might have been designed specifically for this purpose.
‘We’d like to make an order please’
So “price suppression” could end any day, today included. All it would take is one deep-pocketed player to effectively say, “okay, let’s shake things up and see what happens ...”
“We’d like 50 million ounces of silver, please ... and while you are at it, could you throw in 2 million ounces of gold?”
If this nation or customer didn’t get their ounces and then called a press conference and told the world that their order was not being filled this would end “price manipulation” over night.
After all, the world is supposed to be over-run with gold and silver, right? There’s obviously a glut of the stuff as the price of silver has fallen from $50 to $20 in a little over three years.
If nobody wants this “barbarous relic” and demand is so low (which we are repeatedly told it is), why can’t the “market” provide a measly $1 billion worth of physical silver?
In one day, eyes would be opened, dots would be connected, “conspiracy theories” confirmed.
“So the silver market WAS rigged by the buying and selling of paper futures contracts” would be the only conclusion even The New York Times and Bloomberg’s could make.
After this tectonic paradigm shift, probably every investment fund with any dollar assets would scramble to sell their fiat and get as many ounces of “real money” as they still could.
So this is why precious metals were manipulated, people would suddenly understand. To prevent just this from happening.
Of course China and Warren Buffet and all the people who do or could participate in the precious metals markets know that there’s not nearly enough physical metal to satisfy any real order of any size.
It’s the proverbial giant Elephant in the Investing Room. Everyone knows it, but no one talks about it or acknowledges the obvious.
Rule 1: You don’t take possession of precious metals (at least orders of any size). Nor do you ever expect to take possession of precious metals. One simply knows the stuff isn’t there. This is something that is taken for granted; that is understood - the unspoken “secret” that’s really not a secret.
True, nothing is stopping anyone from asking for or demanding to take possession of a big order at any time of their choosing.
Nothing is also stopping any one of us from committing suicide today. But most of us don’t. The same logic is probably at work with those entities which take a pass on demanding possession of precious metals. Day after day, they choose to live another day.
Kick the can down the road. Preserve the Status Quo. Keep playing the game that’s made them wealthy and powerful.
Playing this game requires one to laugh at the notion that precious metal markets are in any way rigged or manipulated. Such conspiracy theories should be dismissed out of hand. Rigged markets? No way (Wink. Wink.)
Mavericks asking for possession ...
The person, company or nation that finally decides to break the unspoken “rules” will make a big order and then expect to have that order filled.
I don’t know about you, but I don’t see any suicidal “maverick” types out there. No “big players” with the power or courage to move markets up, up and away.
The Status Quo requires markets staying in a trading range that’s about where it bounces around today (roughly $18.60 to $21.75 silver).
If a default is to occur, that leaves us grassroots peons, buying in massive quantities we’ve never purchased before.
Or a series of “Black Swan Events” that will make just one Deep Pockets Player abandon “the game” (probably in an effort to look out for No. 1.)
As far as I can tell, it would take just one order by one nation, one bank, one fund or even one individual to bring about the “default” many pundits have long predicted - one investor, trader or nation that concludes they’d like to get as much silver or gold as they can while they still can.
Or maybe one nation (Russia comes immediately to mind) that decides to play real “hard ball” with the American Departments of State and Treasury.
Most big-time “players” in this market have every incentive NOT to force or risk a delivery default in the PM markets.
But it will take just one BSD to quit playing by the rules; to “call the bluff” so to speak, and say “show me your cards ... And, by the way, I want to be paid in physical.”
Just because someone has never taken an action before doesn't mean that circumstances can't suddenly change, and someone decides it's now in his best interest to change behaviors because of this.
"Yes, we've never demanded possession in the past, but we are now."
This too could happen today or tomorrow.
Which explains why many of us are still stacking today.
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Bill Rice, Jr. is managing editor of The Montgomery (AL) Independent. He can be reached by email at bill@montgomeryindependent.com
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